Schwab Report on GM VEBA: Translation?

• GM filed after the close on Wednesday a brief, but in our view important, 8K regarding the status of the Settlement Agreement regarding UAW retiree healthcare coverage.
• Recall that this was the deal hammered out as part of the 2007 contract negotiation with the Union, that effectively will take GM out of the business of providing retiree healthcare (OPEB) beginning in 2010, in exchange for a hefty installment of cash
(upwards of $30 billion) into a new VEBA trust.
• The 8K reported that all conditions have been met and all appeals expired, allowing the deal to become effective (for all practical purposes) as planned on January 1, 2010.
• There was a very important word in the 8K that we think investors should not overlook: “Terminate.” As in, the retiree healthcare plan will be “terminated” on the final settlement date. This is distinct from a plan “amendment,” and as such will receive very different accounting treatment.
• The key distinction is that under settlement accounting (which applies for a termination) the gains/losses generated by the agreement (in this case, a “significant curtailment gain”) will be recognized all at once (in this case, in 3Q08), rather than amortized through the income statement over a period of years, as would have been the case under the amendment accounting treatment that GM was originally seeking (and how the 2005 benefit cut was handled).
• This is where it gets dicey. When GM originally outlined the expected 2010-2011 savings (P&L) that would result from the VEBA deal, which ranged from $2.6 – $3.4 billion per year, the company had assumed it would be amortizing a sizable gain as a result of amendment accounting. In other words, the initial ~$3b estimate included not only the elimination of service and interest cost, but also some extra (significant) help (non-cash, of course) from the amortization of that amendment gain.

[thanks to you know who you are]